KH Group: Ready for cyclical recovery

Translation: Original published in Finnish on 5/7/2025 at 7:50 am EEST.

The continuing operations of the KH Group performed in line with our expectations, but the performance of the Indoor Group was again weak. In connection with this report, we have updated Indoor's value to correspond to the shareholder loan granted to the company in our sum-of-the-parts calculation, but our estimates for other subsidiaries remain unchanged. Relative to our sum-of-the-parts calculation, the stock looks cheap, although the risk of inefficient capital allocation keeps us from taking a stronger view for the time being. We reiterate our EUR 0.65 target price and Accumulate recommendation. 

Solid result from continuing operations

The Group's crown jewel, KH-Koneet, achieved strong growth in Q1 in both Finland and Sweden despite a contracting target market, driven in particular by heavy excavators. As expected, the company's operating result improved from -0.4 MEUR in the comparison period, driven by growth, but landed at 0.1 MEUR in the seasonally slow quarter. NRG's revenue decreased significantly due to a weaker order book and a different sales structure compared to the prior year. The financing situation of wellbeing services counties that has been haunting the company in Finland became clearer during the review period and the order book turned to growth in Finland during the quarter. Despite a sharper-than-expected decline in revenue, NRG's comparable EBIT was slightly ahead of our forecast due to a leaner cost structure following change negotiations. In turn, Indoor Group's Q3 revenue fell by 10% to 34.1 MEUR and clearly missed our 37.2 MEUR forecast. The decline was due to the company's shrinking store network and the declining furniture market. Indoor Group's 2.5 MEUR operating loss was a clear disappointment compared to our expectations, but the change negotiations concluded in December should support the company's profitability from Q2 onwards. 

We assume that KH-Koneet's result is bottoming out

As expected, in connection with the report, KH Group reiterated its guidance for continuing operations, indicating comparable EBIT at about the previous year's level. We have only made minor adjustments to our forecasts for continuing operations, and our adjusted EBIT forecast of 7.0 MEUR is in line with the guidance (about 7.2 MEUR). We expect KH-Koneet's profitability to bottom out amid weak machinery trade in the Nordics, and we see the company having the potential for a significant improvement in earnings as the market recovers. Our forecast revisions for Indoor were negative, and we have updated the company's sum-of-the-parts calculation to reflect the 1 MEUR shareholder loan granted to the company by KH Group. At the same time, we have adjusted Indoor Group's debts from the Group's interest-bearing debts to make it easier to assess the balance sheet structure and earnings-based valuation of continuing operations.

Discount to the sum of the parts supports further purchases

Our sum-of-the-parts calculation indicates a value of EUR 0.78 per share for KH Group. The key of the story, KH-Koneet, has provided strong evidence of its ability to grow despite the weakness in the machinery trade. For the company's value, evidence of a return to growth in return on capital plays a key role in strengthening the international growth story. In our view, the key risk factor for KH Group's investment story is linked to capital allocation and the Indoor Group, which is up for sale, as financing it has proven to be a mistake in recent years based on write-downs. However, the parent company is not responsible for Indoor's debts, as a result of which Indoor only depresses the value of the entity if capital continues to be allocated to the company or if Indoor's difficulties worsen and distract management's attention from other subsidiaries.